Free AccessAboutSectionsView PDF ToolsAdd to favoritesDownload CitationsTrack CitationsPermissionsReprints ShareShare onFacebookTwitterLinked InEmail Go to SectionFree Access HomeINFORMS TutORials in Operations ResearchOR Tools and Applications: Glimpses of Future Technologies Business Engineering: A Practical Approach to Valuing High-Risk, High-Return Projects Using Real OptionsScott Mathews, Jim SalmonScott Mathews, Jim SalmonPublished Online:14 Oct 2014https://doi.org/10.1287/educ.1073.0037Abstract Technologists and engineers endeavor to design and propose leading edge concepts, but the development of these concepts ultimately depends on obtaining funds justified by a business case. Most existing business case tools and methods, which have their origins in the conservative banking industry, tend to favor those project concepts that have secure annuity-like returns such as extensions of existing product lines. This tutorial provides engineers with the business case methods and tools to calculate the value of smaller, more risky projects where new technology or markets are involved, and which potentially offer higher returns in the long run. These straightforward methods and tools have been adopted from sophisticated techniques used in the options markets, where investments in risky securities are routinely traded. We first present an example scenario for a new product and review a typical business case using net present value analysis. Next we develop a "what-if" multi-scenario business case model using Monte Carlo simulation. Then we examine an investment decision using a decision tree to capture scenario flexibility. Finally, we determine a risk-averse investment decision using real options calculated with an intuitive and transparent algorithmic tool. In conclusion we show business engineering as a new approach that provides engineers with investment and risk modeling tools and methods that can be incorporated alongside standard systems engineering design modeling techniques to justify the targeting of project investment dollars to manage risk, shape value outcomes, and make better strategic decisions. This publication has no references to display. Your Access Options Login Options INFORMS Member Login Nonmember Login Purchase Options Save for later Item saved, go to cart Tutorials in OR, TutorialsNew $20.00 Add to cart Tutorials in OR, TutorialsNew Checkout Other Options Token Access Insert token number Claim access using a token Restore guest access Applies for purchases made as a guest Previous Back to Top Next FiguresReferencesRelatedInformation OR Tools and Applications: Glimpses of Future TechnologiesSeptember 2007 Article Information Metrics Information Published Online:October 14, 2014 Copyright © 2007, INFORMSCite asScott MathewsJim Salmon (2014) Business Engineering: A Practical Approach to Valuing High-Risk, High-Return Projects Using Real Options. INFORMS TutORials in Operations Research null(null):157-175. https://doi.org/10.1287/educ.1073.0037 Keywordsreal optionsinvestmentsriskBlack-ScholesDatar-Mathews methodbusiness engineeringstrategic decisionsMonte Carlo simulationsystems engineeringspreadsheet modelingvaluationcapital budgetingNPV financePDF download

The field of real options has been slow to develop because of the complexity of the techniques and the difficulty of fitting them to the realities of corporate strategic decision-making. The Boeing Company has developed state-of-theart methods and tools to create a real options approach that uses the language and framework of standard DCF analysis, a framework the company's financial analysts and managers are already familiar with and feel comfortable using.Besides incorporating the value of managerial flexibility, the main advantages of Boeing's DM method are its simplicity and transparency, which allow for more insightful strategic planning and evaluation while helping decision-makers design strategies with high-benefit outcomes that minimize risks. Because it has the look and feel of an extended NPV analysis and is easily modeled in a spreadsheet using off-the-shelf simulation software, the DM method can be readily learned and used by analysts. And along with the insights into risk provided by probability distributions of possible outcomes, corporate managers also acquire a "real options way of thinking" that may be as valuable as the ability to calculate the values of strategic options.

We propose an intuitive method that is algebraically equivalent to the Black-Scholes formula. The main advantage of this method is its simplicity and transparency. Further, the method implicitly adjusts the discount rate to account for the underlying risk. Our approach relies on information that is available in the traditional project analysis using the net present value technique. When Black-Scholes assumptions are compromised in real projects, our method may provide a better approximation of call value. Our preliminary results suggest that our method provides a reasonable approximation for both binomial and jump diffusion processes where the terminal distributions need not be log-normal.

Pion-nucleus elastic scattering at energies above the Delta(1232) resonance is studied using both pi+ and pi- beams on 12C, 40Ca, 90Zr, and 208Pb. The present data provide an opportunity to study the interaction of pions with nuclei at energies where second-order corrections to impulse approximation calculations should be small. The results are compared with other data sets at similar energies, and with four different first-order impulse approximation calculations. Significant disagreement exists between the calculations and the data from this experiment.